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Volume 2, Number 5

May, 1989

Perestroika and the Debate
over Territorial Economic Decentralization

by Donna Bahry

Last fall’s debate over now-implemented amendments to
the Soviet constitution highlighted the increasingly open con-
flicts between Moscow and its constituent republics. At a time
when perestroika had promised more power to republics and
localities, the amendments to restructure national government
and elections were interpreted as a return to greater central
controls. Gorbachev’s proposals to restore the two-tier legis-
lature of Lenin’s time and to create multi-candidate elections
implied a downgrading of the rights of republics and minority
nationalities. The new Congress of Peoples Deputies and
Supreme Soviet might afford a greater voice to public or-
ganizations and groups, but might also dilute regional and
ethnic representation at the all-union level. Election reform
gave voters choices among candidates and perhaps a degree
of control over public officials, but could also threaten the
hold of titular nationalities on deputy selection in the
republics.

Protests from Tallinn to Tbilisi showed how unpopular
such outcomes might be. In Georgia, some 200,000 people
reportedly turned out to dramatize their support for republic
rights. In the three Baltic republics, new popular fronts and
informal groups gathered hundreds of thousands of signatures
in protest and collaborated on counterproposals; and the Es-
tonian, Lithuanian and Georgian Supreme Soviets voted

1 Ann Sheehy reports that a majority of deputies in the Armenian Supreme Soviet also voted against the amendments, but were overruled on technical
grounds; and deputies to Latvia’s Supreme Soviet voted for a set of counter-proposals instead. See “The First Stage of Gorbachev’s Reform of the

against the draft amendments.' Estonia’s Supreme Soviet
took the opportunity to declare republic sovereignty, with a
resolution asserting its right to reject central laws that violated
the republic’s sovereignty, conflicted with its constitution, or
did not consider its specific local characteristics.” Neverthe-
less, the amendments passed handily in the USSR Supreme
Soviet on December 1, after concessions and pressures from
Moscow to blunt the objections.

The drama had its share of irony: for months, Gorbachev
had criticized republic and local officials for their
misunderstanding of perestroika, dependency on handouts
from Moscow, and “deep-seated parasitic attitudes.”> The
response was a bid to assert regional sovereignty over domes-
tic affairs.

In the aftermath, Gorbachev promised that 1989 would
usher in a new stage of perestroika. This year is to be one of
“harmonizing” inter-ethnic relations, codifying republic
rights (especially economic rights), and reorganizing power
at the local level. Territorial decentralization, Gorbachev
noted, would be critical to the success of the entire economic
reform.’

Yet questions about how, and how much to decentralize
are far from settled. The uneven spread of perestroika among
republics has fostered growing strains between reformist and

Political System and the non-Russian Republics,” Radio Liberty Research Bulletin, 520/88, December 2, 1988; and “Republican Rights and the Proposed
Amendments to the Constitution,” Radio Liberty Research Bulletin, 497/88, November 10, 1988.

2 “Zakon Estonskoi SSR o vnesenii izmenenii i dopolnenii v konstitutsiiu (osnovnoi zakon) Estonskoi SSR,” Sovetskaia Estoniia (vechernyi vypusk),
November 18, 1988, p. 1. The President of Estonia’s Supreme Soviet, Arnold Ruutel, explained some of the reasons for Estonia’s position in a speech to
the USSR Supreme Soviet: Estonia wanted specific guarantees to protect against central directives that would further distort development of its economy
and natural resources; wanted to resolve the confusion and conflict in areas of joint union and republic jurisdiction such as housing, municipal services
and land use; and wanted to preserve its existing legislative and electoral system rather than adopt the new, two-tier structure of Supreme Soviet and
Congress of Peoples’ Deputies envisioned in the amendments. Sovetskaia Estoniia, November 29, 1988, p. 3. The USSR Supreme Soviet adopted a
decree on November 26 declaring the Estonian action incompatible with the Soviet constitution. See Moscow News (supplement), no. 49, 1988, pp. 3-4.

3 See, for example, Gorbachev’s speech to the Central Committee Plenum of February 18, 1988, complaining that local leaders, beset by food shortages,
were inundating Moscow with telegrams requesting help from the center. Moscow News (supplement), no. 9, 1988, p. 4.

4 Izvestiia, November 30, 1988, pp 1-3.

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more conservative regions. The side effects of economic
reform — lower budget revenues, heightened goods
shortages, a worsening deficit — have bred a new strain of
regional protectionism, with the relatively prosperous Baltic
republics limiting exports of goods to the rest of the USSR
and erecting barriers against in-migration. The new openness
about deficits and budgetary relations between center and
periphery has led to outspoken polemics among republic
leaders about who owes whom. Republic spokesmen now
debate openly about the wisdom of further subsidies to less
developed regions. And these issues, in turn, have led to
widely disparate proposals for territorial decentralization
through “self-financing” (khozraschet), ranging from a
simple emphasis on strengthening republic and local budget
rights to a call in the Baltic republics for virtual economic
independence.

For Moscow, the prospect of further territorial
decentralization poses some unenviable dilemmas. As the
experience of economic reform has already demonstrated,
republic and local authorities can develop innovative solu-
tions for the ills of central planning, and the diffusion of such
experiments could help to revitalize economic growth. In fact,
proposals from Baltic economists for a market system have
gone far beyond Moscow’s efforts to mix plan and market.
Since Moscow still seems intent on central direction of
economic policy, granting more local control over the
economy would seriously undermine the center’s ability to
continue its guiding role. Reasserting central guidance over
macroeconomic policy can be a struggle once economic
power is ceded to local authorities, as the Chinese have
discovered. Local control also promises to reduce the center’s
ability to redistribute resources, thus widening the gap in
economic development among regions and reversing a
longstanding policy of subsidizing underdeveloped areas.
And with greater economic inequality, the task of “harmoniz-
ing” inter-ethnic relations is likely to become even more
difficult.

The Issue of Territorial Rights

As a recent article in Kommunist suggests, conflicts be-
tween central prerogatives and local power are likely to
multiply. The authors note that last summer’s Party Con-
ference revealed growing republic and local concern over two
sets of questions: cultural-linguistic development in condi-
tions of Atay: ethnic self-awareness, and territorial-
economic rights. The cultural and linguistic issues have
become familiar ones. Glasnost’ and demokratizatsiia have

brought to the surface debates over the status of minority
languages, the content of education, affirmative action for
non-Russians, the preservation of ethnic homelands, and the
filling in of “blank spots” in the history of non-Russian
nationalities.° And as history is reexamined, so too are old
grievances such as the Armenian claim to Nagorno-Karabakh
and the Tadjik claim to Samarkand.

Territorial economic grievances also reflect some
familiar themes.’ The consensus at the grassroots is stronger
than ever that central controls and sectoral plans have dis-
torted the quality of life in the republics.® Industrial ministries
in Moscow pursue location strategies that seldom reflect local
needs, slighting investment in social and economic infrastruc-
ture, and skirting social costs such as pollution and urban
congestion. They and their enterprises control a major share
— in some areas the dominant share — of funding for social
services but often renege on agreements to develop these
services in tandem with local governments. Hence the
familiar stories about inadequate housing and services, and
new apartment buildings with no stores or roads.

Since ministries often concentrate industrial expansion in
developed areas to exploit the existing infrastructure, the costs
in urban congestion and environmental hazards can be enor-
mous. Regional and local officials complain that Moscow
passes decrees restricting industrial expansion in major cities
and requiring environmental protection measures, but then
grants exemptions to so many enterprises that the effect is all
but lost. Riga’s Chief Architect G. K. Asaris outlined the
problems for visiting Central Committee secretary Vadim
Medvedev last November: the Central Committee and the
USSR Council of Ministers adopted a resolution in 1981
limiting new industrial construction in the largest cities, in-
cluding Riga. Yet central ministries continued to expand
Riga’s industry, with the result that the city’s population grew
by 41% more than had been planned, while housing grew less
than 16%. Riga thus has some 75,000 families on the waiting
list for an apartment. Similarly, despite central government
decrees banning environmental pollution, Asaris notes that
“the [USSR] Council of Ministers has a special section in a
decree allowing enterprises to discharge waste in the
Daugava.”” In agriculture, central ministries are blamed for
imposing irrational and costly crop priorities, for misusing
land and water, and for fostering excessive use of chemical
fertilizers and pesticides. Central Asian cotton offers a case in
point: sown area devoted to cotton expanded over the years
while water resources dwindled and yields declined. Moscow
stressed cotton over more profitable food crops, despite the
shortages in state stores. And chemicals used in the fields left

5 V. Koroteeva, L. Perepelkin, O. Shkaratan, “Ot biurokraticheskogo tsentralizma k ekonomicheskoi integratsii suverennykh respublik,” Kommunist, no.

15, 1988, pp. 22-33.

Alexander Motyl offers an analysis of nationality issues under Gorbachev in “The Sobering of Gorbachev: Nationality, Restructuring, and the West,” in
eae Bialer, ees Rees Society and Nationality Inside Gorbachev's Russia. Boulder, Colorado: Westview Press, 1989, pp. 149-74.

or an overview of regional and local complaints up through Gorbachev’s first year, see my Outside Moscow: Power, Politics and B ry Policies i
the Soviet Republics. New York: Columbia University Press, 1987, ch. 3, 5. i Se Os Oe ae Clee
Previous republic leaders come in for their share of criticism too, for ignoring problems, or giving Moscow a false picture of local conditions. See, e.g., A.

Musaelian, “Uchityvat’ mestnye osobennosti,” Kommunist (Erevan), October 10, 1988, p. 1

Sovetskaia Latviia, November 15, 1988, pp. 1-3.

2

a harrowing legacy of health problems for the local

population.
In construction, ministries and state committees in Mos-
cow are blamed for hypercentralization — insisting on

detailed regulations for homes, stores, and offices that conflict
with local needs. As local planners complain, there is little
reason for someone in Moscow to decide how many floors a
building should have in Vilnius or Tbilisi.

The frustrations at the grassroots are understandable. It is
in Tallinn, Kiev and thousands of other communities where
uncoordinated central plans translate into supply bottlenecks,
consumer goods shortages, transport and construction
problems, and environmental damage. Regional and local
officials are expected to overcome them through careful ter-
ritorial planning. And authorities below the all-union level
must deliver on top leaders’ promises to improve material
living standards for their local populations, since they bear the
primary responsibility for social and cultural services, hous-
ing, and the consumer sector. Yet effective territorial planning
remains an elusive goal as long as most major productive
assets and tax revenues still belong to the center. Central
ministries, for their part, have seldom had strong incentives
to consider local needs, or even to keep regional and local
authorities informed about the continual plan changes in
subordinate enterprises.

The first round of perestroika included several remedies.
Economic experimentation under Gorbachev (and Andropov)
allowed republic and local governments to develop alterna-
tive schemes for economic administration and local planning.
Reform has also encouraged a search for new economic
methods abroad. Estonian officials, for example, have
traveled frequently to Hungary to study its experience with
decentralization and market socialism, and more recently, to
the West to explore industrial and tax policies. Central and
regional leaders alike have studied China’s experience with
special economic zones as a possible model for Soviet border
regions.

Equally important, the economic reform has granted
republic and local governments more authority over planning,
especially in social welfare and the provision of consumer
goods and services. Local soviets have been given the formal
right to reallocate unused supplies, equipment and productive
Capacity among enterprises in their area, and to exploit a small
share of industrial output from all-union enterprises to mod-
ernize and expand local consumer goods production. Local
governments may also have their own enterprises oriented to
the local market, and their own cooperatives and consulting
firms. Republic governments have been granted greater
powers of coordination, especially over the planning and
provision of social services and consumer goods: they will
acquire greater control over investment within their territory,

Donna Bahry

and greater responsibility for enterprises with a regional or
local market. Coordination is to be enhanced by requiring
central ministries to seek local approval for projects affecting
local development.

Implementing these new tasks will mean a major over-
haul of economic and budgetary administration below the
all-union level. Local soviets are acquiring new commissions
of economic experts who will draw up territorial plans, “lead”
economic work in the territory, and coordinate economic
activities among enterprises. More important, republic and
local authorities face a significant change in the way they raise
and spend funds. Moscow’s policy has traditionally been one
of approving programs at the republic and local level and then
allotting shares of all-union taxes to cover any gaps between
planned expenditures and available local revenues. Now, this
“expenditure-driven” system is to give way to one that is
“revenue-driven.” Republic and local governments are to
spend only what they themselves can raise in revenues.
Decrees in 1986 and 1987 took some steps in this direction,
giving local governments the right to tax all-union enterprises,
and the right to keep certain kinds of turnover taxes and
enterprise profit payments collected in their territory. And, of
course, the tax base is supposed to grow stronger as
enterprises adapt to the new economic rules and generate new
revenues. Taxes on cooperative and joint enterprises promise
to supplement it still further.

The Local Impact of Economic Reform

As in any social experiment, the geography of reform has
been uneven. Perestroika is more visible in the Baltic
republics, the Caucasus and the Soviet West in general than
it is in other parts of the country. Estonia, for example, led the
country as of 1988 in number of cooperative enterprises per
capita (380 per million people);!° and Tallinn ranks second
only to Moscow in the number of joint venture agreements
signed (fourteen as of December, 1988, almost all of them
with Finnish firms).! | At the other end of the spectrum, only
three of the 188 joint enterprises registered by the end of 1988
are headquartered in Central Asia.

As public criticism of regional and local performance
suggests, the uneven spread of economic reform owes much
to differences in regional leaders’ commitment and political
capacity to carry it out. Some republic leaders have also had
other pressing problems to contend with: the costs of
Chernobyl (estimated to range between 8 and 12 billion
rubles) in the Ukraine and neighboring regions; the ethnic
violence in Nagorno-Karabakh; the earthquake in Armenia;
and the extensive campaigns against corruption in some
Central Asian republics.

10 Armenia is second with 279, and Lithuania is third with 254. Moscow News, no. 47, 1988, p. 8.

11 Out of the first 188 joint venture agreements signed, close to half are situated in Moscow and Moscow oblast. Tallinn has fourteen, as does Leningrad.
The rest are distributed primarily across the Soviet West and Far East. Ekonomicheskaia gazeta no. 44, 1988, p. 21; no. 45, 1988, p. 22; no. 46, 1988, p.
23; no. 48, 1988, p. 23; no. 49, 1988, p. 23; no. 50, 1988, p. 23; no. 51, 1988, p. 23; no. 2, 1989, p. 23; no. 3, 1989, p. 23; no. 4, 1989, p.23.

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Yet politicians and analysts from virtually all regions
seem to agree on the need to “reform the reform.” Decrees
granting more power to governments outside Moscow have
been only partially implemented because of inadequate
resources, a complex new planning system, continuing min-
istry controls, and lack of enterprise cooperation.

Two leading Soviet specialists on local government,
Georgii Barabashev and Konstantin Sheremet, conclude that
officials at the grassroots have been given more authority, but
without the material and financial resources to back it up. i
In their words, resolutions on expanding local prerogatives
“have been limited to half-measures.” Although discussions
are under way to revise the budgetary system, Moscow still
holds the power of the purse. Local revenue needs still receive
short shrift despite the new tax rules. Not all local govern-
ments get the full revenues allowed by reform decrees, and
enterprises sometimes fail to pay such taxes on time even
when they have the funds.)

Planning below the all-union level has also become more
complicated as “‘normatives” (guidelines, for example on the
proportion of enterprise revenues to be remanded to the min-
istry and to the government budget) have replaced direct
output targets. In theory at least, normatives provide a set of
stable and uniform rules to govern enterprise decisions, so that
managers can avoid the old risks of seeing their plan targets
rise if they perform too well. Yet ministries set different rates
from one year to the next and one enterprise to another, even
within the same sector. Bargaining over normatives has thus
taken the place of bargaining over the old plan targets.

In this environment, regional and local leaders must
persuade ministries and enterprises to allocate enough resour-
ces for local needs. As Barabashev and Sheremet point out,
the law provides them with little leverage, since it lacks any
democratic procedure for protecting local interests in conflicts
with ministries. Local needs often come last, after the ministry
and the enterprise have taken the lion’s share of enterprise
profits.!* Nor do all local governments have an equal ability
to defend their interests: Kirgiziia’s Finance Minister

complains, for example, that local authorities still lack the
resources to assess accurately how an enterprise stands in the
national market.'> The ambiguities surrounding reform at the
local level thus prompted one deputy in the Supreme Soviet
to complain last fall that “The slogan all power to the soviets
is still a slogan.” !©

The economic side effects of perestroika magnify these
funding and planning dilemmas below the all-union level.
Diminished alcohol sales and worsening consumer goods
shortages mean less budget revenue, especially for republic
governments. A 1987 shift in jurisdiction over coal mines,
geological services, and metallurgy industries from the
republic to the all-union level cut the republic revenue base
even further. And as some officials at the grassroots complain,
their budgets have also been eroded by new plan procedures
that allow enterprises to set their own profit plans. The result
is less ambitious plans and thus lower tax payments to govern-
ment coffers.

Revenue problems have been so acute in some republics
that Moscow has had to dole out large and overt central budget
subsidies. The 1989 budget calls for almost 6 billion rubles to
be distributed among Kirgizia, Tadjikistan, Kazakhstan,
Turkmenia and Uzbekistan, with sums ranging from 14% of
the budget in Tadjikistan to 21% in Turkmenia. '” Such direct
subsidies to the republics have largely been avoided in the
past, on the grounds that they would undermine local fiscal
responsibility.!® Funds were redistributed indirectly through
tax sharing schemes that gave less developed regions a higher
share of the all-union revenue collected in their territory, and
through central budget expenditures (whose territorial dis-
tribution was not published). Since the current reforms have
limited these indirect channels for reallocating funds, Mos-
cow has turned instead to more direct and public redistribu-
tion.

Even with direct subsidies from Moscow, the fifteen
republics still face a planned deficit of 11.2 billion rubles in
1989 — the first time in decades that the Soviet government
has acknowledged an unbalanced budget.!? As republic and

12 G. V. Barabashev and K. F. Sheremet, “Pravovaia baza obnovleniia mestnykh sovetov,” Sovety narodnykh deputatov, no. 9, 1988, p. 9.

13 K. K. Kunakunov, Minister of Finance of the Kirgiz SSR, “Na otvetsvennom rubezhe perestroiki,” Finansy SSSR, no. 10, 1988, pp. 8-14; M. G. Pabat,
“Funktsionirovanie finansovogo mekhanizma v regione,” Finansy SSSR, no. 11, 1988, pp. 8-12. Local governments thus net only modest returns from
new taxes on all-union enterprises — for 1989, less than five percent of their revenues will come from this source. The Minister of Finance, B. I. Gostev,
says that local budgets will get 2.1 billion rubles in deductions from profits of union-subordinate enterprises and another 1.7 billion in payments from
all-union enterprises for excess labor. /zvestiia, October 28, 1988, pp. 4-5. Revenues from cooperatives remain modest, too, since the coops accounted for

only 0.8% of retail sales in 1988.

14 Kunakunov, p. 9; F. A. Tabeev, Deputy Premier of the RSFSR, /zvestiia, October 29, 1988, p. 6.

15 Kunakunoy, 10.
16 B. A. Zhuravlev, /zvestiia, October 29, 1988, p. 7.

17 “Zakon SSSR o gosudarstvennom biudzhete SSSR na 1989 g.,” Izvestiia, October 29, 1988, p. 2. This is not, however, the sum total of subsidies to, or
redistribution among republics. Among other things, ministries redistribute funds among enterprises located in different regions, price subsidies have
differential effects across republics, and various taxes are allocated differentially among regions as well.

18 See Outside Moscow, ch 2. Over the last 40 years, planned, direct budget subsidies have been allocated to only a few republics (most frequently,
Kazakhstan), in relatively small amounts, and only in certain years. As of 1985, however, the government budget began to include subsidies of between
10 and 20% of revenues to Kazakhstan and all four Central Asian republics. Note, though, the picture is different below the republic level. Local
governments frequently receive subsidies, because their revenue bases are narrower and less stable.

19 The central government will carry a planned deficit of 23.7 billion rubles. See “Zakon SSR 0 gosudarstvennom biudzhete...”

local leaders point out, the deficit leaves them with a mandate
to improve social welfare, consumer goods production, trade,
and infrastructure at a time when Gosplan and the Ministry of
Finance have failed to cover their revenue needs. The Minister
of Finance, B. I. Gostev, suggested that they should look for
local solutions by finding alternative revenue sources, from
lotteries and auctions to new taxes.”” In their experience,
though, experiments like these simply evoke “the ratchet
principle”: increased logal tax effort typically prompts Mos-
cow to cut the revenues it shares with subordinate govern-
ments.

The deficits are especially problematic for republic and
local leaders now, since Moscow is promising to expand the
social programs that they administer. Gorbachev’s platform
includes a guarantee of separate apartments for every family
over the next twenty years, and plans for 1988 and 1989 have
called for greater social investment across the board. Public
consumption funds in both years have been slated to grow
faster than national income and faster than private consump-
tion, health care is to expand, and teachers are to receive
higher pay.7! And, of course, consumer goods are supposed
to become more plentiful under republic and local super-
vision. While part of that goal is to be accomplished through
greater privatization, regional and local governments are ex-
pected to chip in with more support, too. Some of the costs
can be offset by expanding the private sector and by relying
on user fees for public services such as health care; but as the
controversy Over cooperative prices and incomes
demonstrates, private solutions still encounter public
resistance.

Republic and local officials also face some new and
costly policy choices. With the rise of a Soviet “green”
movement, demands for new environmental cleanup
programs and local protests against industrial expansion have
multiplied. The result is something of a “not in my back yard”
syndrome, as governments below the all-union level refuse to
approve new and potentially hazardous projects. In one case,
USSR Minister of Oil and Gas N. V. Lemaev noted with some
exasperation last November that a meeting in the Supreme
Soviet’s Presidium had approved plans for a new chemical
industry complex, but neither Belorussia nor Ukraine would
agree to build it: “‘Why don’t you build it on the moon,’
they’re telling us now. So it has been decided to build it in the
taiga. That will require an investment of about 15 million
rubles.”*“~ In Lithuania, government and public objections
blocked offshore drilling on the Baltic coast in 1986 by the
same ministry. In Estonia, both the government and the public

20 Gostev, pp. 4-5.

Donna Bahry

are resisting USSR Ministry of Mineral Fertilizers plans to
develop local phosphorites. Other protests over environmen-
tal hazards have spread from Odessa to Frunze to Kamchatka.
And public objections to nuclear power plants since Cher-
nobyl have slowed and in some cases halted new reactor
construction.

For 1989, the combination of higher social spending
priorities, environmental concerns, and budget deficits put
more pressure on leaders outside Moscow to juggle public
demands with limited local resources. They will need to find
new tax sources, or, alternatively, to decide which social
programs to cut, at a time when Moscow has promised to
expand them.

Economic Stringency and
Interregional Tensions

The side effects of the reform program and the highly
publicized budget deficits add to barely suppressed tensions
over inter-regional relations. Republic leaders speak increas-
ingly of economic survival as a zero-sum game, searching for
local defenses against what they view as unfair economic
exchanges. The resulting regional protectionism has been
especially open in the Baltic republics, with restrictions on
sales and exporting of scarce goods to the rest of the country
and barriers against in-migration of labor. These actions, in
turn, add a new intensity to the ongoing debate about
redistribution among the republics.

As Baltic leaders complain, Moscow’s decisions to build
and expand local industries have brought an influx of out-
siders, putting a strain on an already overburdened social
infrastructure. And, of course, the in-migration of non-natives
raises sensitive political questions about the inter-ethnic dis-
tribution of economic benefits and political representation.
Estonia’s Ruutel contends, for example, that “massive
importation of labor has fundamentally altered the ethnic
composition of the population and put the future of the
Estonian nation under a cloud.”

Experiments with economic levers to quell enterprise
demand for outside labor have been only partially successful,
and recent republic proposals call for stricter controls. Latvian
Premier Yurii Ruben announced in August 1988, for example,
that the republic will no longer create new enterprises unless
they use Latvian raw materials and draw labor from among
current residents of the republic.” The Latvian government
has also proposed that workers be allowed to migrate into the
republic (or into its largest cities) only in exceptional cir-

21 The 1989 plan calls for national income produced to grow by 3.8%, and real income per capita, by 3.1%, while public consumption funds are to increase
by 8.2%, and volume of paid services to the population, by 8.1%. It also includes provisions to raise wages for workers in health care and social security
and instructors in higher education; expand maternity leave for working mothers; and extend the period of support for dependent children in poorer
families. “Zakon SSSR o gosudarstvennom plane ekonomicheskogo i sotsial ’nogo razvitiia SSSR na 1989 god,” /zvestiia, October 29, 1988, p. 1. The
1988 plan envisioned increases of 4.3% in national income and 2.7% in real income per capita, but 6.5% in public consumption funds. “Zakon o
gosudarstvennom plane ekonomicheskogo i sotsial’nogo razvitiia SSSR na 1988 god,” /zvestiia, October 21, 1987, p. 1.

22 Pravda, November 2, 1988, pp. 1, 3.
23 Ruutel, p. 3.

24 TASS, August 1, 1988, cited in Radio Liberty Research Bulletin, 350/88, August 5, 1988, p. 6.

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cumstances and only with approval from the local soviet.
Enterprises bringing in such workers would have to pay the
local soviet 25,000 rubles for each worker and for each
member of his family. Other people coming in to the republic
would be prohibited from buying housing and denied
residence permits; and students who come to Latvia for higher
education would be required to £0 back to their previous place
of residence after graduation.”

Growing economic strains have also fostered tensions
over consumer goods. Regional spokesmen note with some
bitterness that their populations do not always reap the
benefits of local production. Moldavia’s V. A. Protsenko told
the Supreme Soviet, for example, that it is not “just” for
Moldavia to be exporting meat to the rest of the country, since
its production is growing but its consumption per capita is
decreasing.” Baltic leaders have expressed concern over
shipments of scarce goods out of their republics, and over
travelers arriving to shop in local stores. Latvia’s Council of
Ministers has moved to restrict individuals from shipping
goods out of the republic and to issue residence cards that
would keep nonresidents from buying such items.7’ And
Estonia recently adopted a similar measure, oe
people from sending hard-to-find goods out of its territory.

The new openness over republic budget subsidies and
deficits does little to reduce these frictions. Discussions of
territorial economic rights are filled with references to
“donor” versus “debtor” regions. Thus Georgia’s Premier O.
E. Cherkeziia told the Supreme Soviet in October 1988 that
Georgia is a net exporter of goods — especially of goods in
high demand: “This has a negative impact on money circula-
tion in the republic, since cash from the sale of Georgian
goods goes into circulation in other parts of the country.”?”
Estonia’s E. A. Paap noted that Estonia will give up 223
million rubles more to the all-union budget than it will get
back this year.” Kazakh Premier Nazarbaev complains that
because of the uneven regional distribution of raw materials
versus finished goods production, and biased price and tax
structures, Kazakhstan loses billions of rubles in national
income to other regions in its position as a supplier of raw
materials.°! Almost all regional spokesmen can thus find at
least some data to show that their area has made undue
sacrifices. Whether any republic is actually a net donor or
debtor is less clear, however, since redistribution comes in a

25 Sovetskaia Latviia, November 10, 1988, pp. 1,3.
26 Izvestiia, October 30, 1988, p. 3.

27 Pravda, November 4, 1988, p. 3.

28 New York Times, February 5, 1989.

29 Izvestiia, October 29, 1988, p. 7.

variety of forms, and complete data on their combined effects
are still scarce.

Talk of donors and debtors has led some regional spokes-
men to propose an outright end to inter-regional subsidies.
Lithuanian economists, for example, in explaining their con-
ception of economic sovereignty, would eliminate subsidies
to other republics and substitute loans instead. Transactions
would thus be based on negotiation between individual
republics rather than on Moscow’s direction. As the Director
of the Lithuanian Academy of Sciences’ Institute of
Economics argues, this arrangement would guarantee
“equivalent exchange among republics. Then it will be clear
who lives how, on his own earnings or not.”

Predictably, the idea of continuing inter-regional trans-
fers finds amore receptive audience in less developed regions.
Some leaders, especially in Central Asia, contend that sub-
sidies are still necessary to rectify past mistakes by the central
government and by their predecessors. Regional leaders also
invoke national security and the traditional ideological
promises of equality to justify further redistribution. In light
of the continuing budget subsidies for 1989, their pleas seem
to have found at least temporary support in Moscow, but the
prospects for further regional equalization appear to be
growing dimmer.

Experiment in Territorial

‘‘Self-Financing”’: Two Views

The uneven geography of reform and the debates over
subsidies to less developed regions have pushed questions
about greater regional economic autonomy and territorial
self-financing (khozraschet) higher on the political agenda
over the last year. Baltic economists in particular argue that
their success with perestroika is threatened as long as their
economies are still subjected to Moscow’s petty tutelage.
Cooperative and individual enterprises, self-managed state
enterprises, and joint ventures need to be freed from the delays
and central intervention that still characterize central plan-
ning. Even if only some republics adopt full self-financing, so
the argument goes, they can provide a model for others to
follow. And as self-financed regions restructure their
economic exchanges with the rest of the USSR, the benefits
of their experiments with a market-oriented system will
spread.>>

30 Izvestiia, October 30, 1988. However, the president of Estonia’s gosplan notes that all told, the republic gets back approximately what it gives out to the

rest of the USSR. Sovetskaia Estoniia, November 23, 1988, p. 3.

31 A. Nazarbaev, “Problemy razdeleniia truda,” Ekonomicheskaia gazeta, no. 5, 1989, p. 16. These complaints are more vehement than in past years, but
they are not new. See the discussion of earlier regional lobbying in Outside Moscow, ch. 2 and 4.

32 Sovetskaia Litva, November 11, 1988, p. 2.
33 Ibid.

Gorbachev has endorsed territorial self-financing in prin-
ciple, and the chairmen of republic gosplany met in Moscow
with Premier Ryzhkov last fall to discuss their ideas of how
it would work. As of 1989, the Baltic republics, Belorussia,
the Tatar ASSR, Sverdlovsk oblast, and Moscow will begin
experiments to develop its basic outlines.** However, the
discussion thus far suggests that republic and local leaders are
far from a consensus on this issue, with proposals ranging
from a simple emphasis on budget balancing to more radical
versions in the Baltic that bring to mind the Articles of
Confederation.*>

Estonia’s initial proposal, published in September 1988,
outlined the radical view.°° In it, the republic would replace
Moscow as the supreme power in Estonia, with full control
over all government agencies, all public property (including
land, minerals, water, forests, government agencies, banks,
buildings, infrastructure, and other public valuables), and all
budget and tax decisions. The republic would also have its
own price system and currency based on the world market. To
support essential functions at the central level such as defense,
foreign affairs and administration, the republic would pay a
“union” tax, according to a formula that would leave residual
revenues to the republic rather than to the center. Relations
with other regions would be based on forging a consensus on
mutual rights and common goals. In essence, the economy
would forego central planning of output or supplies, and rely
instead on the market to guide enterprise decisions.

More conservative approaches have also been sketched
out. Kazakh Premier Nazarbaev, for example, defines the idea
of territorial self-financing as a complement to continued
central planning. As he explains, some branches of the
economy — those of “all-union significance” — need to
remain in the hands of the central government. Others, espe-
cially agriculture and light industry, should be in republic
hands. Although Nazarbaev does not deal with them explicit-
ly, property rights, prices, currency and other issues would
presumably continue to be centrally determined.”

How much republic leaders outside the Baltic support the
radical option is not clear.>® There is a consensus, though, on
who opposes full regional self-financing — namely, leaders
in republics that currently receive subsidies. As Nazarbaev
and others explain, the existing territorial division of labor has
produced a split between primary regions (those with
predominantly extractive industries) and processing regions

34 Izvestiia, October 29, 1988, p. 1.

Donna Bahry

(those with a greater share of finished goods production); the
relatively low prices for natural resources mean that more
enterprises in primary regions operate at a loss. According to
Estonia’s Otsason, “[t]hat is why the 1989 budget foresees a
subsidy to Kazakhstan (the highest in the country) of 2.7
billion rubles. Naturally, to such a republic the idea of
khozraschet means its bankruptcy.”

The Dilemmas of Decentralization

If 1989 is to be the year for restructuring nationality
policy and center-periphery relations, it promises to be a long
year. Finding a workable compromise among the contending
approaches to economic decentralization alone will be a for-
midable task. Gorbachev has narrowed the agenda somewhat
by explicitly rejecting the Estonian model of ceding property
rights and virtually all economic controls to the republics.
That, he argued, would mean a step backward, just when
“integration, division of labor, cooperation [sic] have become
prevalent...” and when combining resources is essential to
collective economic success.” Besides, as Gorbachev noted,
giving the right of full self-financing to republics would be at
odds with enterprise self-financing — and the latter ought to
take precedence.

Yet Gorbachev contends that republics and regions, too,
are to be on full cost-accounting, thus raising the question of
what such a concept will mean in practice. If it is to be the
conservative variant, as a special USSR commission on
republic self-financing recently recommended, substitution of
republic for central controls in light industry, agriculture,
infrastructure, and social services would simply trade one set
of bureaucratic masters for another.*! And if central mini-
stries retain the power to distribute resources or supplies, or
impose state orders, republic and local governments will still
be saddled with the dilemmas of local planning in a system
where sectoral concerns continue to dominate.

Leaving the door open to more radical territorial
decentralization raises the prospect of a less rigid but also less
manageable system of center-periphery relations. It seems
clear that the Baltic republics, at least, would outrun Moscow
in adopting more market-oriented reforms and expanding
foreign economic ties. Yet allowing regional and local
governments more initiative also promises more wrangling
between Moscow and the periphery over the rules of the game

35 Also, “self-financing” may apply at different levels of government, from union republics on down to rural soviets, with different meanings at each level.
36 “Kontseptsiia khoziaistvennogo rascheta Estonskoi SSR (tezisy)” Soverskaia Estoniia, September 30, 1988, pp 1-2. Lithuanian economists adopted a

similar approach. See Sovetskaia Litva, November 11, 1988, p. 2.
37 Nazarbaey, p. 16.

38 Nazarbaev told a Moscow press conference in October that no other republics supported the Estonian model, but Estonia’s Otsason responded that it was
the Kazakh view that had received little support. Sovetskaia Estoniia, November 23, 1988, p. 3.

39 Ibid.
40 Moscow News, no. 49, 1988, (supplement), pp. 1-4.

41 The President of Latvia’s Gosplan, M. L. Raman, who headed the commission, reports in a recent interview that territorial self-financing is to proceed in
stages, and in the initial stage, the agro-industrial complex, light industry, construction, the construction materials industry, trade, the forestry and timber
industries, and certain all-union enterprises producing consumer goods are to be assigned to republic jurisdiction. In addition, economic infrastructure of
“regional significance,” “interbranch” production, housing, municipal services, local transport, health, education and other public services are also to be
regional and local concerns. Ekonomicheskaia gazeta, no. 11, 1989, pp. 9-10. Note, however, that these are the sectors where republics already share

jurisdiction with Moscow; see Outside Moscow, ch. 2, 3.

The Harriman Institute Forum

(as in the amendments to the Constitution) as well as over
substantive economic issues such as interregional trade flows,
industrial location, environmental protection and even foreign
policy. After all, joint ventures, growing foreign trade and the
possible creation of special economic zones are bound to pull
each region’s economic interests in different directions. The
geography of joint venture creation already suggests some
predictable cleavages, with the Baltic republics and
Leningrad attracting capital from Finland, the rest of the
European USSR focused on Western and Eastern Europe, and
regions east of the Urals looking to Asia.

Greater decentralization of economic power to republics,
oblasti, or lower governments also promises to spur a new
round of localism. Making the republic or the locality
economically self-sufficient by definition makes local needs
the prime consideration for regional and local leaders. En-
couraging territorial self-sufficiency in the absence of true
markets and market prices also fosters underuse or misuse of
scarce resources. As China’s experience with decentralization
demonstrates, the unintended consequences can be extremely
difficult to contain.4” When regional and local authorities are
encouraged to put their own area first, they tend to invest in
smaller-scale and often duplicative projects geared to the local
economy, thus dispersing investment and bidding up the price
of capital goods. And with infant enterprises to promote and
jobs to protect, the temptation to impose protective barriers
against goods and migration from other regions grows
stronger. With the dispersion of resources, central investment
projects to develop energy resources, infrastructure and other
collective goods become more difficult to fund, since they
must compete with local projects for capital goods and since
the central government finds it more difficult to generate

Editor: Paul Lerner
Assistant Editors: Rachel Denber, Lolly Jewett
Copyright © 1989 by The Trustees of Columbia University in the City of New York.
All Rights Reserved. Reproduction of any kind without written permission is strictly prohibited.
ISSN Number: 0896-114X.

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budget revenues. And once local projects are on line, the
central government may find it difficult to reassert control
over where and how public resources are spent; central
economic directives simply get ignored.

Finally, extensive decentralization threatens to under-
mine the modest degree of economic equalization that has
been achieved among regions and ethnic groups. As the
debate over territorial self-financing reveals, requiring
republics to pay their own way will be especially problematic
for “primary” regions in Central Asia, where local industry
and agriculture concentrate on less profitable products. Local
leaders can, of course, diversify and reorient factories and
farms, but the conversion will require substantial capital that
does not seem to be forthcoming from Moscow. Nor is it clear
that even a massive infusion of new capital would produce the
economic results that Moscow would like. Gaps in levels of
economic development and living standards could therefore
grow wider. Ethnic inequalities are likely to become even
more pronounced if protectionism creates barriers to inter-
regional migration, and republics’ insistence on the use of the
local language further inhibits mobility across regional
borders.

Thus more radical territorial decentralization raises the
prospect of a society in which ethnic/linguistic cleavages and
economic inequalities coincide ever more closely — making
both more difficult to manage in a new and more open political
environment.

Donna Bahry is an Associate Professor of Politics at New
York University. She is the author of Outside Moscow:
Power, Politics and Budgetary Policies in the Soviet
Republics (Columbia University Press, 1987).

42 See the account of China’s problems in the New York Times, December 11, 1988, pp. 1, 26; and in Christine Wong, “Material Allocation and
Decentralization: Impact of the Local Sector on Industrial Reform,” in Elizabeth Perry and Christine Wong, eds., The Political Economy of Post-Mao

China, Cambridge: Harvard University Press, 1985, pp. 253-80.

8